INTERNATIONAL HRM

Chapter 8
Dr Nur Kamarul Hafiz bin Jamil
Faculty of Business and Accountancy
Lincoln University College
 INTERNATIONAL COMPENSATION
LEARNING OBJECTIVES:
• Examine the complexities that arise when firms move from compensation
at the domestic level to compensation in an international context.
• Outline the key components of an international compensation program
• Outline the two main approaches to international compensation (Going
Rate and Balance Sheet Approach) and the advantages and disadvantages
of each approach
• Introduce a third emerging approach to international compensation: Local
Plus
• Examine the special problem areas of taxation, valid international living
cost data and the problem of managing TCN compensation
• Examine recent developments and global compensation issues
 Objectives of
International Compensation
The objectives of international compensation for multinational enterprises (MNEs) align with both the
organizational needs and the expectations of international employees. Let's break down these objectives:

Objectives for the MNE:

• Alignment with Strategy, Structure, and Business Needs: Compensation policies should support the
overarching goals and operations of the MNE. This includes considering the company's global strategy,
organizational structure, and specific business requirements in different locations.
• Attracting and Retaining Talent: The compensation policy should be competitive enough to attract and retain
skilled employees, particularly in areas where the MNE has significant needs and growth opportunities. This
involves offering incentives for foreign service, tax equalization, and reimbursement for reasonable costs
associated with international assignments.
• Cost-Effectiveness: Facilitating the transfer of international employees in a cost-effective manner is crucial
for the MNE's financial sustainability. This includes managing expenses related to relocation, compensation,
and benefits while ensuring the efficient deployment of talent across borders.
• Equity and Administration: The compensation policy should promote fairness and equity among employees
while also being administratively manageable. This involves considering factors such as consistency,
transparency, and ease of implementation across different international locations.
 Objectives of
International Compensation
Objectives for the International Employee:
• Financial Protection: Employees expect the compensation policy to
provide financial protection, including benefits, social security, and
coverage for living expenses in foreign locations.
• Financial Advancement: International assignments should offer
opportunities for financial advancement through increased income,
savings, or other financial incentives.
• Addressing Living Expenses: The policy should address practical issues
such as housing, education for children, and home leave
arrangements to ensure the employee's well-being and smooth
transition into the foreign location.
 Key Components of
An International Compensation
Program for Expatriates
1) Base Salary:

• Definition: The primary component of an expatriate's compensation

package, serving as the foundation for other allowances and benefits.
• Variability: Can be paid in the home or local country currency or a
combination of both.
• Differential Pay: Often adjusted based on the employee's home
country or international rates, influencing the overall package.
 Key Components of
An International Compensation
Program for Expatriates
2. Foreign Service Inducement and Hardship Premium:
• Purpose: Provided to PCNs as an incentive for accepting foreign
assignments and compensating for challenges in the host location.
• Eligibility and Amount: Determined based on factors like location
hardship, assignment duration, and potential tax implications.
• Payment Structure: Can be a percentage of base salary or a lump-sum
incentive.
 Key Components of
An International Compensation
Program for Expatriates
3. Allowances:
• Cost-of-Living Allowance (COLA): Compensates for cost differentials between the home and host
country, covering various expenses like transportation, housing, and discretionary items.
• Housing Allowance: Aimed at maintaining home-country living standards, determined by family
size and job level, with options including company-provided housing or financial assistance for
housing-related expenses.
• Home Leave Allowances: Covers expenses for trips back to the home country, facilitating family
and business ties renewal to ease adjustment during repatriation.
• Education Allowances: Covers tuition, supplies, and other education-related expenses for
expatriates' children, with considerations for local versus international schooling options.
• Relocation Allowances: Covers costs associated with moving, shipping, temporary living, and
other relocation-related expenses, often contingent on tax-equalization policies and practices.
• Spouse Assistance: Addresses income loss for expatriate spouses through employment assistance
or one-time allowances.
 Key Components of
An International Compensation
Program for Expatriates
4. Benefits:
• Healthcare: Includes coverage for medical expenses both domestically
and internationally.
• Pension Plans/Social Security: Addresses complexities in portability
and tax implications across different countries.
• Life Insurance: Provides financial protection for expatriates and their
families.
• Child Allowances: Supports childcare expenses for expatriates.
• Profit Sharing/Stock Option Plans: Offers additional financial
incentives for employees.
 Key Components of
An International Compensation
Program for Expatriates
5. Vacations and Special Leave:
• Annual Home Leave: Provides airfares for families to return to their
home countries.
• Rest and Rehabilitation Leave: Offers paid leave for employees and
their families to recuperate in more comfortable locations.
• Emergency Provisions: Assists employees in cases of family illness or
emergencies, especially in hardship locations.
 Approaches to International
Compensation of Expatriates
The Going Rate Approach The Balance Sheet
The Going Rate Approach, also known as the Market Rate The Balance Sheet Approach, widely used for international
Approach, ties the base salary of international transfers to the compensation, aims to ensure that expatriates maintain their
salary structure of the host country. Here's an overview of its home-country living standard while also providing a financial
key characteristics, along with its advantages and disadvantages: inducement to make the package attractive. Here's an overview
of its key characteristics, along with how it addresses the
expenses associated with international assignments:
Characteristics:
• Base Salary Linkage: The base salary is determined based on Characteristics:
local compensation surveys and reflects prevailing salary
levels in the host country. • Objective: To keep the expatriate "whole" by maintaining
relative compensation to PCN colleagues and compensating
• Benchmarking: The multinational decides whether to for the costs of an international assignment.
benchmark against local nationals (HCNs), expatriates of the
same nationality, or expatriates of all nationalities in the host • Base Salary Linkage: Base salary for expatriates is linked to
country. the salary structure of the relevant home country, ensuring
consistency with home-country standards.
• Supplementation in Low-Pay Countries: In locations with
lower salary levels, the multinational often supplements the • Equalization of Purchasing Power: Aims to equalize the
base pay with additional benefits and payments to maintain purchasing power of expatriates between their home country
competitiveness. and the host country.
The Going Rate Approach
The Going Rate Approach
 The Balance sheet Approach
Four Major Categories of Outlays:
• Goods and services (e.g., food, clothing, recreation)
• Housing (major housing costs in the host country)
• Income taxes (both parent-country and host-country taxes)
• Reserve (savings, pension contributions, education expenses)

Implementation:
• Cost Allocation: Costs associated with the host-country assignment that exceed
equivalent costs in the home country are met by both the MNE and the expatriate to
ensure parity in purchasing power.
• Spreadsheet Example: A typical spreadsheet outlines the components of the expatriate
package, including foreign service premium, hardship allowance, housing, and tax
deductions, showing how the package is split between home-country and host-country
currencies.
The Balance Sheet Approach
The Balance Sheet Approach
 A Third Emerging Approach
to International Compensation:
Locus Plus
The emergence of the Local Plus approach to international compensation presents
a unique alternative to traditional approaches, particularly in the Asia Pacific
region. Here's an overview of the Local Plus approach, its benefits, disadvantages,
and its implications for multinational enterprises (MNEs):

Characteristics:
• Definition: Expatriate employees are paid according to prevailing salary levels,
structure, and administration guidelines of the host location, supplemented with
expatriate-type benefits.
• Benefits: Typically include assistance with transportation, housing, and
dependents' education, acknowledging the expatriate's foreign status.
• Flexibility: Allows for tailoring of benefits based on individual and corporate
objectives, offering a hybrid version of the Balance Sheet and Going Rate
Approaches.
 Locus Plus
Advantages:
• Cost Reduction: Helps MNEs reduce international assignment costs by offering lower-cost
alternative packages.
• Attraction of Talent: Appeals to expatriates, especially junior and middle management staff, who
are willing to accept reduced packages for valuable international experience.
• Adaptability: Suitable for long-term assignments, permanent transfers, and intra-regional
transfers, addressing the diverse needs of different assignment types.

Disadvantages:
• Shift in Power Balance: Local Plus compensation tends to shift the power balance in favor of
expatriates, potentially impacting their commitment and loyalty to the firm.
• Retention Challenges: Expatriates on Local Plus packages may become more marketable on the
international labor market, increasing the risk of losing them to competitors.
• Impact on Global Staffing Objectives: Losing expatriates during assignments can disrupt MNEs'
broader global staffing objectives, affecting workforce stability and continuity.
 Locus Plus
Implications for MNEs:
• Retention Concerns: MNEs need to address retention challenges
associated with Local Plus compensation to ensure workforce stability
and continuity.
• Competitive Positioning: Must consider the potential impact of Local
Plus packages on their competitive positioning in the international
labor market.
• Talent Management: Need to develop strategies for managing
expatriate talent effectively, balancing the benefits of international
experience with retention risks.
 Taxation
Taxation in international compensation is a complex and often concerning aspect for HR
practitioners and expatriates alike. Here's an overview of how multinational enterprises
(MNEs) typically handle international taxation and the challenges they face:

Handling International Taxation:

• Tax Equalization:
• Firms withhold an amount equal to the expatriate's home-country tax obligation and pay all taxes
in the host country.
• Additional premiums or allowances are paid by the firm, tax-free to the employee.
• Tax Protection:
• The employee pays taxes up to the amount they would pay in their home country.
• Any difference in taxes paid is retained by the employee.
• Other Approaches:
• Ad hoc and laissez-faire approaches exist but are less common and not recommended.
 Taxation
Challenges and Considerations:
• Dual Taxation: Expatriates may be subject to taxation in both their home country and the
host country, leading to potential complexities and costs.
• Regulatory Variations: Varying income tax rates and regulations across countries
necessitate careful planning and often require the assistance of international accounting
firms.
• Benefit Considerations: Pension plans, medical coverage, and social security benefits
pose challenges due to differences in cultural practices and national sovereignty.
• Policy Considerations: MNEs must decide whether to maintain expatriates in home-
country benefit programs, enroll them in host-country programs, or create alternative
arrangements.
• Long-term Assignments: With an increasing number of long-term international
assignments, MNEs may need to create permanent international assignee cadres,
requiring ongoing attention to tax and pension processes.
 Taxation
Future Considerations:
• Complexity and Dynamism: National tax and pension processes are
culturally embedded and politically volatile, promising ongoing
complexity and requiring significant resources, time, and attention
from international HR managers.
• Global Coordination: Seamless networks of global firms, specialist
consultants, and local and regional interests are a goal for managing
international taxation and benefits but remain challenging to achieve.
 International Living Costs Data
Obtaining accurate and up-to-date information on international living costs is
crucial for multinational enterprises (MNEs) managing expatriate
assignments. Here are some key points regarding international living costs
data:

Sources of Information:
1.Consulting Firms Surveys: Many consulting firms conduct regular surveys
to calculate cost-of-living indexes for various cities worldwide.
2.Specialized Services: MNEs often rely on consulting firms that offer
specialized services relevant to HRM in a multinational context, including
data on international living costs.
 International Living Costs Data
Recent Findings:
• Top Expensive Cities: A recent survey ranked the ten most expensive
cities, with New York, Oslo, and Geneva among the top.
• Price Differentials: Price differentials between Eastern and Western
Europe have narrowed, with Western Europe averaging 26% higher
prices.
• Impact of Events: Unexpected events like currency devaluation can
have a dramatic impact on living costs and require swift adjustments
to compensation packages.
 International Living Costs Data
Basket of Goods:
• Debate: There is ongoing debate about what should be included in the "basket of
goods" used to calculate living costs.
• Examples: Some use unconventional measures like the "Big Mac Index" to gauge
living costs around the world, highlighting disparities in purchasing power.

Business Costs vs. Living Costs:

• Wider View: Some indices focus on business costs rather than just living costs,
considering factors like wages, expatriate costs, taxes, corruption levels, and
infrastructure.
• Developed vs. Developing Countries: Developed countries tend to rank higher in
terms of business costs due to higher wage costs.
 Differentiating Between
PCNs and TCNs
Parent Country Nationals (PCNs):
• Definition: PCNs are employees working abroad who are citizens of
the country where the multinational enterprise (MNE) is
headquartered.
• Compensation Basis: PCNs typically receive compensation based on
the salary structure of their home country.
• International Experience: PCNs may have less international
experience compared to TCNs, as they are often stationed in one
foreign location for an extended period.
 Differentiating Between
PCNs and TCNs
Third Country Nationals (TCNs):
• Definition: TCNs are employees working abroad who are citizens of a
country other than the home country of the MNE.
• Compensation Basis: TCNs may also receive compensation based on
the salary structure of their home country, which can be
advantageous for MNEs headquartered in countries with high
managerial salaries and strong currencies.
• International Experience: TCNs often have significant international
experience, as they frequently move between countries in the employ
of multinational corporations.
 Differentiating Between
PCNs and TCNs
Compensation Considerations:
• Cost Savings: Paying TCNs based on their home-country base salary
can be cost-effective for MNEs, particularly if their home country has
lower managerial salaries and weaker currency.
• Justification Challenges: Justifying pay differentials between PCNs and
TCNs can be challenging and may require careful communication and
consideration.
• Talent Retention: As MNEs expand and international revenue
becomes more significant, retaining talented TCNs becomes
increasingly important, necessitating a review of compensation
policies.
 Differentiating Between
PCNs and TCNs
Alignment with Staffing Policies:
• Ethnocentric Staffing Policy: If the MNE follows an ethnocentric staffing
policy (favoring employees from the home country for key positions), the
compensation policy should focus on maintaining relativity to PCN
colleagues and compensating for the costs of international service.
• Geocentric Staffing Policy: If the MNE follows a geocentric staffing policy
(favoring the best person for the job regardless of nationality), establishing
a system of international base pay for key managers, regardless of
nationality, may be more appropriate. This approach allows for flexibility in
dealing with variations in base salaries for managers across different
countries.